10 Microfnance and Loan Sharking

democracy are only as good as a key member of the executive branch of the government wants it to be, particularly one which dreams of oligarchy.

Notes

1. Albert Bartlett, “Forgotten Fundamentals of the Energy Crisis,”

Negative Population Growth Special Report, 1977. 2. Torstein Veblen, “In Dispraise of Economists: Why Is Economics Not an Evolutionary Science?”, in Te Portable Veblen (New York: Viking

Press, 1948), pp. 232–233. 3. Te Economist.com, “In Come the Waves,” June 16, 2005. 4. Business Week, February 11, 2008, p. 41. 5. Washington Post, July 21, 2005, D1. 6. Te Economist.com, June 16, 2005. 7. Danielle Booth, 2017, p. 4. 8. Ibid., p. 22. 9. Wayne Barrett, “Andrew Cuomo and Fannie and Freddie: How the

Youngest Housing and Urban Development Secretary in History Gave

Birth to the Mortgage Crisis,” Te Village Voice, August 5, 2008. http:// www.netadvisor.org/wp-content/uploads/2014/10/2008-08-05-New-

York-Andrew-Cuomo-and-Fannie-and-Freddie-Village-Voice.pdf. 10. Alan Greenspan, “Remarks by Chairman Alan Greenspan,” lecture given at Federal Reserve Community Afairs Research Conference,

April 8, 2005. https://www.federalreserve.gov/boarddocs/speeches/ 2005/20050408/default.htm. 11. René Stulz, “Credit Default Swaps and the Credit Crisis,” Working

Paper 15384, National Bureau of Economic Research (NBER), p. 3. http://www.nber.org/papers/w15384, National Bureau of Economic

Research. 12. Alan Greenspan, “Economic Flexibility,” speech to HM Treasury enterprise Conference, 2004, London, U.K. https://www.federalreserve.gov/ boarddocs/speeches/2004/20040126/default.htm. 13. Alan Greenspan, “Te Financial Crisis and the Role of Economic

Regulators: Testimony of Dr. Alan Greenspan, Committee of Government

Oversight and Reform,” October 23, 2008. https://www.gpo.gov/fdsys/ pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm.

14. Kathryn J. Byun, “Te U.S. Housing Bubble and Bust: Impacts on Employment,” Bureau of Labor Statistics Monthly Labor Review,

December 2010, p. 3. 15. Dan Wilchins, “Lehman Files for Bankruptcy, Plans to Sell Units,”

Reuters, September 15, 2008. 16. Joel Magnuson, Mindful Economics: How the US Economy Works, Why

It Matters, and How It Could Be Diferent (New York, NY: Seven Stories

Press, 2008), pp. 298–336. 17. Business Week, July 11, 2008, p. 66. 18. See the Bureau of Labor Statistics historical employment data at http://data.bls.gov/timeseries/CES0000000001?output_view=net_ 1mth; see also Byun, “Te U.S. Housing Bubble and Bust: Impacts on

Employment,” pp. 10–16. 19. Ellen Brown, Te Public Bank Solution (Baton Rouge, LA: Tird

Millennium Press, 2013), p. 3. 20. Simon and Kwak, p. 207.

References

Barrett, Wayne. “Andrew Cuomo and Fannie and Freddie: How the Youngest

Housing and Urban Development Secretary in History Gave Birth to the

Mortgage Crisis,” Te Village Voice, August 5, 2008. http://www.netadvisor. org/wp-content/uploads/2014/10/2008-08-05-New-York-Andrew-Cuomoand-Fannie-and-Freddie-Village-Voice.pdf. Bartlett, Albert. “Forgotten Fundamentals of the Energy Crisis,” Negative

Population Growth Special Report, 1977. Booth, Danielle. Fed Up: An Insider’s Take On Why the Federal Reserve Is Bad for

America (New York, NY: Penguin, 2017). Brown, Ellen. Te Public Bank Solution (Baton Rouge, LA: Tird Millennium

Press, 2013). Bureau of Labor Statistics. https://data.bls.gov/timeseries/CES0000000001? output_view=net_1mth. Business Week, July 11, 2008. Business Week, February 11, 2008. Byun, Kathryn J. “Te U.S. Housing Bubble and Bust: Impacts on

Employment,” Bureau of Labor Statistics Monthly Labor Review, December 2010, p. 3.

Te Economist.com, “In Come the Waves,” June 16, 2005. Greenspan, Alan. “Remarks by Chairman Alan Greenspan: Economic

Flexibility,” HM Treasury Enterprise Conference, 2004, London. https:// www.federalreserve.gov/boarddocs/speeches/2004/20040126/default.htm. Greenspan, Alan. “Remarks by Chairman Alan Greenspan,” Federal Reserve

Community Afairs Research Conference, April 8, 2005. https://www.federalreserve.gov/boarddocs/speeches/2005/20050408/default.htm. Greenspan, Alan. “Te Financial Crisis and the Role of Economic Regulators,”

Committee of Government Oversight and Reform, October 23, 2008. https://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG110hhrg55764.htm. Magnuson, Joel. Mindful Economics: How the US Economy Works, Why It

Matters, and How It Could Be Diferent (New York, NY: Seven Stories Press, 2008). Stulz, René. “Credit Default Swaps and the Credit Crisis,” Working Paper 15384, National Bureau of Economic Research (NBER), p. 3. http://www. nber.org/papers/w15384.

10

Microfnance and Loan Sharking

As we take into account these stories of recurring fnancial system instability, it raises the question of if it is even possible to make banking and fnancial stable and serve the purpose of social provisioning. At every turn there seems to be a new innovation that has become all the rage because it promises great things for people and the environment while generating handsome profts and lucrative careers. Tings like socially responsible investing, impact investing, organic food production, fair trade, green energy, and so many other initiatives were cast in the limelight as win-win business models in which entrepreneurs could do right by the world and make big bucks along the way. Te main drive of all these business models is that they have been designed to change our economic activities in such a way that the goal of making livelihoods is aligned with broader goals of social and environmental goals of equity, sustainability, and proftable business.

Undeniably this drive is part stems from a growing awareness of impact that widening wealth inequality, climate change, and unserviceable debt is having on the world’s poorest populations. Tese problems are becoming so exigent that they can no longer be ignored. Consumers, businesses, and governments everywhere see a need for

© Te Author(s) 2018 J. Magnuson, Financing the Apocalypse, Palgrave Insights into Apocalypse Economics, https://doi.org/10.1007/978-3-030-04720-7_10

243

change direction, though real economic change is complicated, and fnding real and lasting solutions remains distant and intractable. As a result, genuine eforts tend to be postponed. Problems get rolled over into the next year, next decade, or next generation. As they do, they become more severe. Tis is the central issue with mounting debt because it never feels like a real problem as long as we can keep putting of repayment. Sinking into a quicksand of unsustainable debt is unfortunately a familiar circumstance for people the world over. Regardless of how or why people become trapped by debt, their circumstances are made much worse with predatory lending practices, or loan sharking, that deliberately target those who are already economically vulnerable.

Banks or fnancial companies can have an enormous impact on economy and ecology depending on how it is done and what types of projects are fnanced. Microfnance was once held in high esteem as an innovative alternative to loan sharking as strategy for poverty reduction in the developing world. Te strategy, as it was originally conceived decades ago, is simple. Microfnance, (or microcredit) institutions received source funds largely from international aid agencies. Te funds were channeled into underserved communities as small, low-cost loans that could be used for investments in simple capital like a sewing machine or a water pump. Te borrowers could then use their investment to create microenterprises that generate income and possibly a surplus to pay back the loans. Under the leadership of Bangladeshi economist, founder of the Grameen Bank, microfnance pioneer, and Nobel Prize recipient Mohammed Yunus, the model became established as a means to help the poor. Microfnance advocates rejoiced that the model was to become a sustainable, self-funded, closed loop of economic development that provides income and contributes to the economic vibrancy of otherwise impoverished communities. Yunus was awarded the Nobel Peace Prize in 2006. Te model was celebrated with all the glitter of superstar status and was vaulted internationally as the development strategy. Tat is, until its mission began to morph and fell signifcantly short of its promise.

Te microfnance model had caught the attention of the neoliberals in Washington during the Greenspan Era. While the model was being celebrated, it was changing into something else. As the Washington

Consensus steamrolled around the world, the US government and source fund agencies began pressuring developing countries commercialize their microfnance sectors and reshape them into a neoliberal dream: individualistic bootstrap fnance, for-proft entrepreneurship, and the elimination of government aid in the fght against poverty. Te reality, however, was a diferent story. Data showed that by the time of the Greenspan Era, microfnance could not give any indication that it was improving living standards for the people it was supposed to help. What was clear from the data, however, was that commercialization of microfnance resulted in soaring profts for the lenders and soaring inequality. Loan sharks returned in drag, only by then they could take cover behind the popularized image of a neoliberal success story. It was drawn into a cult characterized by a blind slavishness toward innovation and quasi-religious faith in free markets.

In January 2011, Muhammad Yunus refected on this and lamented in a New York Times editorial that, “I never imagined that one day microcredit would give rise to its own breed of loan sharks…. Commercialization has been a terrible wrong turn for microfnance, and it indicates a worrying ‘mission drift’ in the motivation of those lending to the poor.”1 Yunus’s candid declaration of mission drift is consistent with so many aspects of modern fnance that we have explored. At one time the institutions and models were development as part of a mission to improve the lives of people, only to drift toward profteering, speculation, or gambling.

Seeing this from an institutional perspective, however, there are deeper and more pernicious forces at work that simply allowing greed to derail the mission. Under corporate hegemony and its historical relentless to commodify, securitize, and fnancialize everything it touches, poverty itself is fnancialized. In this and the chapters that follow, we shall see how even the things that are almost unimaginable to be subjected to fnancialization have become just that. Te globalization of corporate hegemony and its neoliberal ideology have made fnancial instruments out of poverty, out of people’s desire to help others pull themselves out of poverty, and even out of climate change. In a twist of modern history, the eforts to deal with damage done to people and their habitat by corporate capitalism have

become the newest frontiers for corporate proft-making and opportunities for posh careers for the corporate class.

Microcredit and Loan Sharking

Loan sharking has been around for as long as banking itself. Wherever there are people who have fallen onto hard times, which is everywhere, there are lenders who lure them into a trap. Te promise quick and easy loans that provide leverage people can use to pry themselves out of fnancial desperation—maybe to get through a business slump, a bad crop yield, or maybe just to pay a month’s rent or buy food. Te trap gets laid down as the sharks allow the borrowers to put of paying back the loan principal for a time and roll the accruing interest into a larger future loan. Unpaid principal and interest quickly snowball into a larger debt burden for which the lenders agree to keep rolling forward only at increasingly higher interest rates as compensation for mounting risk exposure. Borrowers fnd themselves overwhelmed, but they also scramble hard to fnd ways to make debt payments out of fear of being cut of of credit. Te poor sink while the sharks make fortunes.

Traditionally loan sharking was largely confned to mafa type organizations that make predatory loans outside the parameters of banking institutions and government regulations. Sharks used coercion, blackmail, and violence to enforce repayment. But it is largely a matter of degree and method that separates legal banking from sharking. Payday lending in the United States is a $6 billion industry.2 Tese are typically small loans or cash advances that are made to borrowers on the single criteria that they have a job with a regular payday. Tese lenders are considered the most predatory—exploiting the fnancial vulnerability of borrowers—of the legal fnancial sector. For this reason, they are regulated in most places with usury laws, or interest rate caps, set somewhere between 30 and 40% annual percentage rate (APR), and with limited origination fees. In places without usury laws, the APR could be several hundred or even into the thousands. Te trap is set when the borrow comes through the front door and is presented with an instant loan at what appear to be reasonable rates.

Say a borrower needs a $500 loan. Te borrower goes to the payday lender, shows proof of employment or secures it with a postdated check, then agrees to pay back the principal plus say 20% interest within 30 days. If the borrower fails to pay according to terms, then the principal and interest roll into the next 30 days and so on. But even if they pay the loan back on time, the APR is much more than 20%. Te terms of the loan were set to be paid in a month, which if annualized could snowball to 800% in a year. Once on the hook, the borrower’s liability could soar from $500 to well over $4000 in 12 months. At that point, the mafa lender can use coercive methods to extract thousands from borrowers who are already poor and desperate.

Lending by credit card associations among the large commercial banks is not all that diferent. Rates are high and each month the banks issue a bill with the minimum payment amount featured prominently with the intention of enticing the cardholder to pay the minimum and thus accruing more interest to the bank and eventually falling into a debt trap. Borrowers are nonetheless compelled to stay current with their payments because of the long-term damage defaults can do to people’s credit standing, which can afect their careers, possibility of home ownership, and ability to rent housing.

Sharking aside, small-scale lending, or microcredit, has always been an important aspect of community economic development. Te objectives of the microcredit models that are legitimate in terms of social provisioning involve making very small loans to people, often those in communities that are struggling economically, that would allow them to fnance small income-generating projects—microfnance. Te goals are not to enrich lenders, but to help people develop microenterprises, improve livelihoods, and make them less vulnerable to sharks. Models of microfnance have been around for at least a century as fnancial cooperatives and savings associations that were originally created to help communities survive troubled economic times.

Te model of microfnance that has gained so much attention in recent decades, particularly during the Greenspan Era, is that which has been heralded as the solution to problems of poverty in developing countries of Asia, Africa, and Latin America. Te origins of the model date back to the early 1960s and the Cold War during which

the United States and the Soviet Union were competing for political infuence in the developing world. In the decades after World War II, the United States sought to see developing countries pull themselves out of poverty through the capitalist institutions of market system and private enterprise. Under the leadership of president Dwight Eisenhower, the US government used its infuence, money, and military strength to pursue that goal wherever possible, at the same time suppressing socialist and popular democratic movements. US aggression was palpable as troops were sent around the world setting up what were often dictatorial regimes as a levy to hold back popular uprisings. Te fear in Washington was that such uprisings could form into communist insurgencies and the countries themselves could turn into client states of the Soviet Union. Te Americans were discovering, however, that such aggression was backfring. Populist movements were turning to the Soviets for help as they watched American marines and warplanes invade their countries.3

Te United States shifted toward a softer policy to gain infuence by providing fnancial assistance and other resources to quell insurgent movements and radical change.4 Te testing ground for this approach was in tried out in Latin America under the leadership of Eisenhower’s successor to the White House, John Kennedy. Kennedy initiated a program entitled Alliance for Progress. Te program began in 1961 immediately after he became the US president, and a year and a half after Fidel Castro’s “26th of July Movement” in which Castro succeeded in overthrowing Cuba’s authoritarian regime and established a state socialist government. Te program was also put in place in part as a response to the failed American “Bay of Pigs” invasion of Cuba.

Alliance for Progress called for a comprehensive set of social and economic reforms, including redistribution of land, currency stabilization, long-term economic planning, and sustained growth. Te US government pledged that in exchange for a commitment to these reforms, it would ofer fnancial assistance. Under this program, the United States provided over four billion per year (in current dollars) in foreign aid to countries in Latin America such as Peru, Bolivia, and Brazil.5 Te money earmarked as foreign aid streamed in from both public and private sources some of which became source funds for the nascent MFI

industry in recipient countries. From there microfnance evolved into a network that linked together source funds, donations, aid agencies, non-governmental organizations (NGOs), government institutions, and MFIs. Te network was established on the belief that individuals could actively defeat their own condition of poverty by developing livelihoods, as opposed to the belief that they can only stay out of poverty by being passive recipients of charity or public assistance.

Te microfnance model was predicated on the assumption that selfhelp options for the poor were possible and likely to succeed if individuals could obtain a bit of capital to put together a microenterprise self-proprietorship. Te strategy was seeming to work for a time in the seventies and eighties, although with mixed results. Te majority of the source funds were provided by government agencies and international institutions such as the United States Agency for International Development (USAID) and the World Bank’s afliate the InterAmerican Development Banks (IDB). Te model expanded from Latin America to Asia, and in particular Bangladesh under the highly charged inspiration of Muhammad Yunus.

The Grameen Bank

After a series of microlending experiments conducted in Bangladesh during the seventies, Yunus became convinced that microloans could go a long way in the efort to eradicate poverty if they were used as start-up capital for small, informal microenterprises as was the case in South American countries. In both South America and Asia such small-scale enterprises constituted self-employment ventures in areas such as food carts, retail shops, basket weaving crafts, pedicabs, or bicycle repair shops. Seeing progress in the enterprises, Yunus became convinced that he grinding poverty that has been so prevalent in his country, particularly among women, could be eradicated in a single generation.6

Yunus embarked on a mission to do just that. With the help of Shorebank, a community development bank based in Chicago, Yunus was able to secure a modest grant from the Ford Foundation

for research and development. Along with the Ford grant, Yunus also nailed down $3.4 million in grants from the International Fund for Agricultural Development (IFAD) at the United Nations.7 Finally, with these grants in a portfolio, Yunus was able to persuade the Bangladesh to grant funds matching that of the IFAD government to authorize a bank charter for the Grameen Bank as an MFI entity housed in Bangladesh’s central bank. Te bank was established, and by 1983 it was privatized to become an independent, for-proft fnancial institution, and within a couple of years the majority of its shareholders were private investors.

Grameen quickly became the prototype MFI. It worked in conjunction with development NGOs with a mandate to provide services for poor people in rural areas. International aid agencies saw the NGOMFI connection as more efective in this efort as these institutions were seen less at risk for corruption or misappropriation of funds compared to government. Te Grameen model had the potential to become an alternative to government anti-poverty programs and emphasized self-help entrepreneurship, and an open market environment. Yunus appealed to governments and international aid agencies for donor money to help expand MFI outreach and capacity by emphasizing success, “…if poor people can achieve all this through their own eforts within a market environment, why isn’t the world doing more of this?”8 Microfnance economists Milford Bateman and Ha-Joon Chang documented the popularity of the Grameen model, particularly by the onset of the Greenspan Era and globalization of neoliberalism, “Te international donor community very much liked what Yunus was saying, and so agreed to underwrite his bold ideas for promoting self-help and individual entrepreneurship among Bangladesh’s poor through a dedicated institution—the Grameen Bank.”

Te bank was also rapidly gaining notoriety in part because of Yunus’s public pronouncements of Grameen’s success. Te momentum was on the Grameen model was soon copied “all over Bangladesh and then all over the world. A new efcient model of poverty reduction and ‘bottom-up’ development appeared to have been found.”9 It was sublimated as a panacea for poverty elimination everywhere, even though there were growing concerns that the evidence was not confrming this.10

Nonetheless, its operations expanded and were replicated in Nepal, Vietnam, various locations in Africa, and back again in Latin America.11

One of the hallmark characteristics boasted of the Grameen MFI model was the high loan repayment rate, which according to Yunus was around 98%. A number far greater than conventional banking loan repayment.12 Te key to achieving such high repayment rates rests with the group collateral concept and the focus on women. It is assumed in this model that women in many developing countries lacked collateral of their own names but could be relied on to repay their loans on the basis of group collateral of a community. Individual households rely on the community for assistance when things break down such as food washouts or drought. But such reliance is also predicated on each household being vested in the community by establishing a positive reputation and goodwill among community peers. In Bangladesh particularly, this was the job of women. Geographer and microfnance expert, Kate Maclean explains, “Women are often charged with maintaining the reputation of the family and with ‘servicing’ community relations.” As it this responsibility falls on women to maintain, it stands to reason that the banking model would tie social collateral and lending practices to women. Maclean also points out that “We should not be surprised that staking a woman’s friends, family, and neighbors against a loan is an efective way of guaranteeing repayment.”13 It might also be fair to say that there is a diference between gender empowerment and using gender as leverage for repayment.

MFIs efectively fnancialized a gender-based custom of social cohesion ad transformed it into fnancial collateral. Such cohesion becomes valueless outside its role as a resource to be used to facilitate the fows of capital. As the push to continue fnancialization under the expanding corporate hegemony and the global sweep of neoliberalism, the Grameen model took center stage. Other MFIs patterned after Grameen spread everywhere and millions of the world’s poor were pulled into global corporate hegemony through the MFI network. For countries where microfnance initiatives were expanding, neoliberal economists were making bold pronouncements about how fnancial innovation, government deregulation, and free market capitalism promise to bring poor people out of poverty by fnancing petite capitalism.

Te mystique of microfnance that the American government found so compelling was that it promised to defy history and bring capitalism down to the poor.

Te message being cast around the world was that the Cold War was over and capitalism has emerged triumphant. Te aid-based model of Kennedy’s Alliance for Progress was becoming obsolete and the market-based MFI would take over. Te poor would have no excuse not to become small-scale capitalist entrepreneurs and pull themselves out of poverty. As they do, they would not need to rely on any form of public aid, nor should they feel compelled to join social and political movements that challenge the global capitalism market system. Te same Washington Consensus economists who pushed the world to deregulate their capital markets, which led to the crises in Tailand and other parts of East Asia, were pushing for MFIs to be the model of a broader move toward privatization. MFIs were seized upon to be used for other purposes beyond fnancing small-scale entrepreneurs. Microcredit programs began a mission drift toward privatized water reclamation and sanitation projects, thus facilitating the extension of fnancialization to the commons; to public goods that were shared by all. Governance of public goods and services was being re-evaluated, and wherever we encounter the question of governance we are encountering institutional structures and the rules for control. Privatization involves a shift away from governance by public institutions to private ones; away from social provisioning toward proft opportunity.

Philip Mader from the Institute of Development Studies at the University of Sussex studied the use of microfnance in the neoliberal push to fnancialization during the Greenspan Era. He noted that MFIs are increasingly being used to “extend the reach of private fnance into the governance of traditionally publicly managed goods.” Tis involves the usual elements of forming corporate start-ups, selling securities to investors, and commodifying water services to be sold for proft. Te neoliberal vision is that with market incentives, water entrepreneurs are motivated to supply water, making water more available than otherwise would be the case.

As is so popular among well-intentioned models for change that get coopted by neoliberalism, microfnance enthusiasts are quick to

celebrate the magic of win-win market scenarios. Once water rights are privatized and sold to a private company, the company sells water to farmers and households to recoup their investment costs and generate a proft. Users of water can apply for microloans to pay for the spendy water and the government is relieved of the burden of having to provide water as a public good. In the win-win narrative, farmers get the water they need with MFI credit, investors make profts, MFIs make interest income, and government is free to focus on other things. Neoliberals rejoice. In the world of corporate hegemony these arguments need not be backed with data. Tey are considered pious.

As he critically examined this model, however, Mader found that there has been no evidence showing that microfnance helped make water more accessible or qualitatively improved. What he discovered most distinctly instead was that microfnance initiatives were being pushed with cultish fervor, “Te processes of groupthink …may help to explain why, despite the lack of proof, so many proponents of microfnance conclude again and again that more microfnance is key to addressing social problems.”14

Groupthink is similar to cognitive dissonance as it is a social-psychological phenomenon of consensus without critical evaluation. People involved in something big like this are prone to get pulled into a dynamic in which the more powerful voices of devotion to the cause create a group atmosphere in which critics or those who simply raise questions are driven out of the group. Te groupthink consensus holds a grip on the imagination of people by rationalizing away evidence suggesting that the mission is vulnerable to failure or is slipping of the rails. Groupthink creates caricatures of its critics as cynical, curmudgeonly, or politically spiteful. It relies heavily on a constant stream of propaganda while strategically undermining opposing views or strategies.

Te MFI privatization movement has been saturated with neoliberal narratives on how public services are inefcient, lack proft incentives to be productive, and tangled in government bureaucracy, as expressed by MFI privatization advocate Robert Varley at USAID, “Municipal or state-owned utilities are often inefcient, overregulated, and unable to supply even the formal sector with adequate services.”15 Such statement

is regularly rolled out as forgone conclusions along with assumptions that the market can always do better. He argues further that water and sanitation facilities are “attractive to many poor urban and peri-urban [suburban] residents and generate personal economic benefts for which consumers are both willing and able to pay.”16 Te neoliberals can make such demand-led arguments with confdence because those who are not able to pay are pushed out of the market, and the win-win scenario applies only to those who have the means to pay private companies a price that covers operations, profts, and interest for the microloans.

Central to Varley’s argument is that entrepreneurship stands a better chance of positive impact—a more cost-efective way of supplying water—because free markets are a more open and fuid means to attract fnance and to provide competitive services.17 By having users pay for water directly, the model links cost recovery of the producers to the private benefts of the consumers. Te key point in this narrative is cost recovery. If water can be provided in such a way as to internally cover costs without public subsidization, it proves the efciency of the market system, or so the argument goes. If cost recovery, however, is the main concern here then the market system is indeed a win-win institution. Markets have a built-in rationing function that, if left to the forces of supply and demand, will always eliminate surpluses or shortages of any commodity. If a surplus of water exists, the price falls and producers have a disincentive to supply and they cut back, but demand rises until the surplus is vanquished. If a shortage exists, the price rises, suppliers are incentivized to produce more and demand falls until the shortage is eliminated. For privatized water—like so many other crucial but unaffordable services such as health care and housing—the fall in demand means weeding those who cannot aford to pay out of the market. Being weeded out of markets is consistently the fate of the poor. Yet helping the poor get out of poverty was supposed to be the mission of microfnance. But in cult atmospheres, such critical views are also weeded out of the scene entirely.

After working in microfnance for ten years on three continents, economist Hugh Sinclair published an expose highlighting the cultish nature of the MFI industry. In his book titled, Confessions of a Microfnance Heretic: How Microfnance Lost its Way and Betrayed the

Poor (2010) Sinclair writes, “Te microfnance community often resembles a religious cult. Criticism is considered heresy and is not tolerated. Impact on poverty is dogmatically claimed but demonstrated in only exceptional cases.”18 His concern is shared by Mader and many others who are veterans in the business who raise the question of why there is such a devotion to microfnance even though, as we will see, there is virtually no evidence that it is helping people get out of poverty.

Does Microfnance Work?

Te short answer to that questions is no. At least not according to the studies conducted thus far. But the answer depends on how we mean by what works. For the champions of the Grameen model, the litmus test is the high repayment rate. Author and USAID consultant Mohini Halhotra put it succinctly and suggestion that successful MFI passes the test when their “clients, who are paying full price for services, vote with their feet and come back for more. Poor clients are borrowing, saving, repaying, and retuning to purchase additional services at above-market interest rates. Tat is as honest an impact assessment as I need.”19

For MFI whistleblowers high repayment possibly tells a diferent story. In their view, it is more likely a sign of debt trap, the very target of the microfnance movement in the frst place. As mentioned above, debt trap is common wherever there are people who need to borrow money because they are struggling, not just in developing countries. If borrowers accumulate so much debt that they deplete their funds to pay the balance due, they must borrow more to sustain their living. Tey also are compelled to keep up with their debt payments to keep their credit open. More borrowing is a drain because of the accruing interest liability. Unless the conditions that cause the hardship in the frst place are changed, trapped borrowers cannot pay down their principal.

Perhaps a question that should be asked is whether MFI programs are pulling people out of poverty in measurable numbers and not just highlighted in apocryphal stories and anecdotes. Maren Duvendack from the School of International Development at the University of East Anglia looked into this. She and her team of researchers located four

large-scale independent studies conducted between 1996 and 2011 on the impact of microfnance on poverty in places where MFIs were operating their anti-poverty interventions (programs).20 Te team examined the studies for wellbeing indicators such as positive changes in income, spending trends, holdings of assets, health, education, and other measurements that would signify improvements in people’s standards of living. After studying the microfnance reviews, they found signifcant problems with the methodologies of the studies and concluded that, “Despite the apparent success and popularity of microfnance, no clear evidence yet exists that microfnance programmes have positive impacts. Tere have been four major reviews examining impacts of microfnance. Tese reviews concluded that, while anecdotes and other inspiring stories purported to show that microfnance can make a real diference in the lives of those served.”21

Te Duvendack group decided microfnance needed to be re-investigated with improved methodology with random control trials, and because the industry has since undergone much development and is bolstered with new technologies since the original studies. Tey conducted a thorough investigation in academic databases, aid organization archives, books, and journal literature, and found 58 studies that were suitable for detailed study. Teir conclusion from their rigorous re-examination was the same as before—zero impact.22

As the MFI had become such a high profle, celebrated phenomenon, the discourse surrounding their fndings were peculiar and consistent with the phenomena of groupthink and cognitive dissonance. Instead of accepting that perhaps MFIs are not living up to their legends, industry devotees were inclined to interpret the null results as a not-not-positive indication.23 Tat is to say that it is a priori assumption that microfnance does have positive results, and this conclusion shall remain orthodox until it is proven unequivocally otherwise. But even so, the question remains as to why the steadfast adherence to MFI if there is no evidence to support its efcacy.

Tere is a deeper level of critical analysis here that is connected to the broader situation of fnancialization. Te vast majority of those are impacted by MFI programs and payday lenders are people who perform labor to make their livelihoods. If they ever want to rise above

debt trap, they have to do even more work to earn the extra income to pay of their debts and interest. In Marxian terms, this extra work is labor performed beyond what is socially necessary for living, which gets expropriated by owners of capital—the MFIs and their investors. Financialization in this case is the process of converting poverty and hard times into a market—the fnancialization of poverty. Malcolm Harper, author and former microfnance enthusiast summarizes, “Microfnance ofers a more subtle and potentially more durable means whereby those who control capital can exploit those who have only their labor to sell… Capitalists no longer have to organize and manage labor. Tey can extract a higher return on their capital not by directly employing people, but by fnancing their petty businesses under the use of assisting them to become entrepreneurs.”24 Duvendack and her group put numbers behind this assertion. Te global MFI industry is expanding and is in excess of $100 billion annually. Looking at the aggregate MFI loan portfolios between 2003 and 2010, they estimate about somewhere between $88.8 billion and $124.6 billion in yields was paid from borrowers to MFI companies and their investors.25,26

Returning to the question of why all the microfnance hype if it is exploitative and shows to have no impact on wellbeing of the poor. A partial answer to that is given by Duvendack’s research: it’s proftable. It represents a frontier in the corporate hegemony’s broader quest for emerging markets and opportunities.

Institutions Matter: The Washington Consensus and Microfnance

Hugh Sinclair refected on his experience observing how microfnance shifted from a model that was intended to help the world’s poor to a model that exploited them, “Good, honest, hardworking microfnance practitioners were gradually replaced with a single motivation: proft”27 Te win-win gimmick was wearing thin as recipient countries were increasingly pressured by the Washington Consensus to push MFIs into a for-proft, self-funded, commercial industry. Te source funding

institutions based in Washington DC such as USAID and the World Bank and their afliates in Europe attached strings to their continued support of MFIs. Trough these institutions the corporate hegemony fexed its muscles and pressed MFIs transform into an image mirroring Wall Street.

In the mid-nineties, the World Bank under the new leadership of James Wolfensohn established a new body called Te Consultative Group to Assist the Poorest (CGAP). Te body was given the mandate to coordinate microlending programs among donor-institutions, which meant pressuring all the institutions to conform to its neoliberal plans. Wolfensohn was an experienced Wall Street investment banker and had also worked closely with the Federal Reserve to orchestrate the bailout of Chrysler Corporation in 1979 (see Chapter 7). He was no stranger to neoliberalism or to working as a servant to corporate hegemony.

CGAP produced a rule book designed to provide guidelines on how to make MFIs more commercially viable institutions. Te book, titled Good Practice Guidelines for Funders of Microfnance, which came to be known as the “pink book” from its cover, laid out strictures for source funding, the most important of which is “to complement private capital and to accelerate innovative domestic market solutions.”28 In a phrase, neoliberalism is thus encapsulated: private capital, efcient markets, and the idolatry of fnancial innovation. Ultimately what this meant for the poor was higher and higher interest rates and a return to the good old days of loan sharking. Te push for this innovation, as we will see shortly, had more to with the survival of MFI institutions than it did with serving the poor.

According to the Microfnance Information Exchange, some MFIs in Mexico for example were charge as much as 82% interest on loans. Exploitative rates triggered a backlash and some branches were set on fre while people chanted “We’re not paying.”29

Te commercialization of MFIs was top-down institutional pressure. It was the very same pressure, even the same people—Greenspan, Rubin, Summers, and Wolfensohn—that pressured countries everywhere to liberalize their capital markets to make way for wild instabilities in the nineties (see Chapter 8). Neoliberalism provided the ideological window dressing for shaking corporation loose to do what

they do best—to scour the planet in the hunt for new proft opportunities and emerging markets. Despite that, and despite the fact that neoliberalism had piloted the global economy into an abyss of speculative bubbles, crises, and economic ruin from Mexico to Tailand to Iceland to Wall Street, and despite that it has failed the majority of people in the world, it remains a cult favorite. Bateman and Maclean write, “Te notion that microfnance emerged and was subsequently promoted because it is an intervention that can successfully address poverty and underdevelopment is not just simplistic, as even most microfnance advocates now accept, it is largely false.”30 Sinclair, too, blows the whistle, “Some microfnance is extremely benefcial to the poor, but it is not the miracle cure that its publicists would have you believe. Microfnance has been hijacked by profteers, and we need to reclaim it or the poor.”31

In the microfnance world, profteers are loan sharks. Under pressure from the Washington Consensus and under the rubric of neoliberal ideology set forward in the Pink Book, microfnance reverted to the very loan sharking enterprise it was created to work against. Yunus laments,

To ensure that the small loans would be proftable for their shareholders such banks needed to raise interest rates and engage in aggressive marketing and loan collection. Te kind of empathy that had once been shown toward borrowers when the lenders were nonprofts disappeared. Te people whom microcredit was supposed to help were being harmed… Commercialization has been a terrible wrong turn for microfnance, and it indicates a worrying ‘mission drift’ in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.32

Tis message, along with those of Bateman, Maclean, Sinclair, Duvendack, all point to the same conclusion that microfnance has had no measurable beneft for the poor, ignores the structure causes of poverty in the frst place, has reverted to loan sharking, and represents mission drift far from its original intentions. It stands as an extension of corporate hegemony and facilitates the fnancialization and exploitation of poverty and the social collateral of poor women, and it does all of this behind the ideological shield of neoliberalism. It is institutionally

and ideologically fxed into the structure of corporate hegemony, and as such it stubbornly prevails.

Not only does microfnance prevail in this way, it is evolving and proliferating. Microfnance if anything exemplifes the adaptability of corporate capitalism and its ability to survive. In the wake of so much criticism, MFIs morphed to ft itself into new ecological niches. In the 2006 edition of the Pink Book spells out a broader mission, “Poor people need a variety of fnancial services, not just loans. In addition to credit, they want savings, insurance, and money transfer services.”33 With much fanfare and yuppie TED talks sublimating new MFI “products” microfnance innovated and rebranded.

Among the most remarkable strokes of MFI innovation is the “fnancial inclusion” movement. As data poured in and it became increasingly clear that microfnance was debunked, the industry suddenly recreated itself in the image of Wall Street universal banks—one stop fnancial shopping center. Te spin was that poverty eradication was not able to be realized because the MFIs were not yet fully developed. Tey needed to expand into a broader array of fnancial services.34 Microfnance shifted to a wider focus to include microsavings plans and investment strategies, microinsurance, microleasing, digital payment opportunities, and even forays into cryptocurrencies.35 Te argument for fnancial inclusion was identical to those of Wall Street banks that argued for deregulation and consolidation of commercial banking, investment banking, and insurance—competitiveness and diversifcation as a strategy to mitigate risk. Te mission of poverty eradication—social provisioning—was drowned out by the feverish buzz of yuppie hype.

Microfnance institutions distanced themselves from microcredit, changed their mission statements, and even some changed their names of their companies and wrapped themselves in happy talk. As we will see in the next chapter, another dimension to the MFI is the peer-to-peer models in which small-scale donors can be involved by “directly” providing donation funds through internet portals.

Rebranding and product diferentiation are tried and true methods of staying alive amidst the corporate capitalist survival of the fttest. At one time cofee shops just sold cofee along with some scones or doughnuts. Such shops are either long extinct and replaced Starbucks or have

adapted by ofering lattes, hazelnut lattes, frappucinos, and caramel macchiatos. So too has become the menu of microservices. As for poverty, though, let them drink lattes.

Notes

1. Muhammad Yunus, “Sacrifcing Microcredit for Megaprofts,” Te New

York Times, January 14, 2011. 2. https://fles.consumerfnance.gov/f/201403_cfpb_report_payday-lending.pdf. 3. Martin Gilens and Benjamin Page, “Testing Teories of American

Politics: Elites, Interest Groups, and Average Citizens,” Perspectives on

Politics, Vol. 12, No. 3, pp. 564–581. 4. For a complete story of soft power in American political strategy, see

Joseph Nye, Bound to Lead: Te Changing Nature of American Power (New York, NY: Basic Books, 1990). 5. Ronald Scheman, Te Alliance for Progress: A Retrospective (New York,

NY: Praeger, 1991), pp. 10–11. 6. Milford Bateman and Ha-Joon Chang, “Microfnance and the Illusion of Development: From Hubris to Nemesis in Tirty Years,” World

Economic Review, Vol. 1, 2012, p. 14. http://wer.worldeconomicsassociation.org/fles/WER-Vol1-No1-Article2-Bateman-and-Chang-v2.pdf. 7. Ford Foundation Annual Report 1980. New York: Ford Foundation, 1980, p. 21. Retrieved from http://www.fordfound.org/elibrary/documents/1980/normal/low/1980norm-low.pdf. See also the Duke

Sanford School of Public Policy, “Te Ford Foundation and the

Grameen Bank,” 2012, p. 14. 8. http://www.thecommonwealth.org/document/34293/35178/152062/ 37474/commonwealth_lecture_2003.htm. 9. Bateman and Chang, 2012, p. 3. 10. Lamia Karim, “Te ‘Scandal’ of Grameen; Te Nobel Prize, the Bank, and the State in Bangladesh,” in Milford Bateman and Kate Maclean (eds.), Seduced and Betrayed: Exposing the Contemporary Microfnance

Phenomenon (Albuquerque, NM: University of New Mexico Press, 2017), p. 204. 11. “Te Ford Foundation and the Grameen Bank,” 2012, p. 17.